A Guide To the Fees Charged when you Apply for a Mortgage

Most people base their decision on the interest rate being charged, the number of years the rate is available and the type of mortgage it is.house_2171105b

But before you plunge ahead, you should stop and look at the fees.  While interest rates have tumbled over the past few years, mortgage-related fees have shot up and can now easily add another £2,000 onto the overall cost of your mortgage.

To make matters worse there’s a whole list of charges and different lenders can have different names for each. Here’s a rundown of what you need to know:

Booking fee: A booking fee is charged upfront and pays for ‘booking’ the loan while your application goes through.  It can also be known as an ‘application’ or ‘reservation’ fee. A booking fee is usually around £99 but can be slightly higher while some lenders don’t charge it at all.  It won’t be refunded if you end up not taking the mortgage out.

Arrangement fee: An arrangement fee is what you pay for the lender to set up your mortgage. Arrangement fees vary significantly and you could be charged up to £2,000, although the average is about £1,000. You can usually choose between paying the arrangement fee upfront and adding it to the mortgage but it will ultimately cost more to do the latter as you will pay interest on it.  In some cases it can be worth opting for product with a slightly higher interest rate in return for a lower fee, than going for the lowest rate if the arrangement fee is really high.

Valuation fee: This pays for your lender’s survey on the property you want to buy. This is a basic survey which is only to check the property is adequate security for the loan.  The cost of a valuation fee varies considerably and some mortgages even come with free valuations.

Legal fees: Legal fees pay for a solicitor to do the legal paperwork for you – a process known as conveyancing – and are usually charged as a percentage of the mortgage price. Mortgage lenders often have offers where they contribute to these fees or will pay the standard legal fees on a remortgage.

Higher lending charge (HLC): Higher-lending charges were commonly charged on mortgages with high a loan to value. The money from the HLC is often used by the lender to buy an insurance policy which protects itself should you default on the mortgage. Since the amount you have deposited is only small, this covers the lender if your property falls in value after you buy it. The HLC is usually refundable if you don’t go ahead with the mortgage and expressed as a percentage of the loan.

CHAPS fee: This covers the lender’s costs when sending the mortgage funds over to your solicitor.

Own building insurance fee:  This is charged by your mortgage lender for checking you have taken out building insurance if you choose not to buy it from them. The fees are fairly small – around £25 to £50 each.

APR: All mortgages have an APR (annual percentage rate). The APR is calculated to factor in the total interest cost over the whole mortgage term, plus any fees.  In theory this should help you to compare deals but mortgage APRs can be a bit confusing because they only give you the average cost if you were to keep your mortgage product for the full term, which is pretty unlikely. You might, for example, have a two-year fixed rate mortgage at 1.65%, which then moves to the Standard Variable Rate (SVR) of 4.49%. This would give you an APR of 4.2% – but you’d never actually pay that rate as you would remortgage onto another fixed rate. So it’s always better to simply compare the initial rate you’ll pay and also check what the SVR will be when that rate comes to an end.

Early repayment charges (ERC): Most mortgage deals tend to have a short life. For instance, fixed rate, discount and tracker mortgages usually only run for between two and five years, though it is possible to find deals over 10 years. Whatever the term, if you come out of the deal before it ends, you will have to pay an Early Repayment Charge which, in most cases, is charged as a percentage of the loan. These can add up to thousands of pounds so make sure you think carefully about how long you tie in for in the first place.

Exit fee: An exit fee is charged for closing your mortgage account – for example, if you switch to another lender or remortgage to another deal with the same lender. But it can also be charged when you just finish paying off your mortgage. Also known as a mortgage completion fee, deeds release fee or exit administration fee, the cost can now ring in at between £50 and £200.